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IMPACT TO THE SMALL BUSINESS DEDUCTION COMING IN 2019
Upcoming rate changes for Corporations will start for yearends after December 31, 2018. According to Bill C-74, impact the tax on passive income there will be two main changes.
The first change will be the reduction of the Small Business Deduction (SBD). For every dollar of Adjusted Aggregate Investment Income (Passive income now known as AAII) the SBD will be reduced by $5. This will occur when the passive income of a corporation or group exceeds $50,000 in the previous years- if the total AAII reaches $150,000 then the small business deduction will be lost all together.
For corporations in Alberta, this means that earning investment income over $50,000 will create a marginal tax rate of $130.67%- additionally when the dividends from these companies are flowed to the shareholder they will now be taxed at the integrated rate of 50.26% up from 48.88%
The second change is a little more complex and will change the existing RDTOH (refundable dividend tax on hand) for Canadian Controlled Private Corporations. It will now be split into two pools which must be tracked. Basically the dividends will then be reflective of the income source -, if from passive income they will be eligible, vs non-eligible.